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Lecture

Foundations of Financial Economics

In course

MGT-301: Foundations in financial economics

The aim of this course is to expose EPFL bachelor students to some of the main areas in financial economics. The course will be organized around six themes. Students will obtain both practical insights through real-world examples and understand how one can ...

Description

This lecture covers the time value of money, net present value rule, and agency problems in financial economics. It explains how money's present value differs from its future value, the importance of NPV in project evaluation, and the challenges managers face in aligning with shareholders' interests.

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Instructors (3)

Rüdiger Fahlenbrach

RUEDIGER FAHLENBRACH is Full Professor at Ecole Polytechnique Fédérale de Lausanne (EPFL), Switzerland. Formerly on the faculty of the Fisher College of Business of the Ohio State University (USA), he holds a Ph.D. in Finance from the University of Pennsylvania (Wharton). He holds a senior research chair from the Swiss Finance Institute, and is research member at the European Corporate Governance Institute (ECGI). He has research interests in empirical corporate finance, in particular corporate governance and entrepreneurship. Ruediger Fahlenbrach has published in the leading academic journals in finance, including the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies and the Journal of Financial and Quantitative Analysis. Ruediger currently serves a three year term as elected director of the European Finance Association (2018-2020). He is Associate Editor of the Review of Finance, and former associate editor of the Review of Financial Studies and Financial Management. His research has been reported in many large-circulation newspapers such as The New York Times, The Wall Street Journal, The Economist, Le Temps, NZZ, Handelsblatt, Forbes Magazine, USA Today, and Fortune Magazine.

Julien Hugonnier

Pierre Collin-Dufresne

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Related concepts (32)

Present value

In economics and finance, present value (PV), also known as present discounted value, is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money has interest-earning potential, a characteristic referred to as the time value of money, except during times of zero- or negative interest rates, when the present value will be equal or more than the future value. Time value can be described with the simplified phrase, "A dollar today is worth more than a dollar tomorrow".

Net present value

The net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount rate. NPV accounts for the time value of money. It provides a method for evaluating and comparing capital projects or financial products with cash flows spread over time, as in loans, investments, payouts from insurance contracts plus many other applications.

Financial economics

Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as share prices, interest rates and exchange rates, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e.

Time value of money

The time value of money is the widely accepted conjecture that there is greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference. The time value of money is among the factors considered when weighing the opportunity costs of spending rather than saving or investing money. As such, it is among the reasons why interest is paid or earned: interest, whether it is on a bank deposit or debt, compensates the depositor or lender for the loss of their use of their money.

Economics

Economics (ˌɛkəˈnɒmᵻks,_ˌiːkə-) is a social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes what's viewed as basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers.

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